- In the emergency Federal Open Market Committee’s (FOMC) meeting that took place on March 15th, participants judged that it would be appropriate to lower the federal funds rate by 100 basis points to 0 to 0.25% in response to economic challenges presented by the coronavirus. There was unanimous agreement that the “effects of the pandemic would weigh on economic activity in the near term and that the duration of this period of weakness was uncertain”. They stated that the “unpredictable effects of the coronavirus outbreak were a source of major downside risks to the economic outlook”.
- Participants decided that there needed to be a “forceful” monetary response. Participants judged that they will need to hold the target range at its effective lower bound until policymakers were “confident that the economy had weathered recent events”. Some participants preferred a 50 basis points rate reduction as they wanted greater assurance that “the transmission mechanism of monetary policy via financial markets and the supply of credit to households and businesses was working effectively”. They also worried about sending an overly negative signal to financial markets.
- Despite these concerns, the FOMC also decided to launch a quantitative easing program by agreeing to “increase the Federal Reserve’s holdings of Treasury securities by at least $500 billion and its holdings of agency MBS by at least $200 billion”. Some participants stressed that it was important to communicate that this program was enacted to “support the smooth functioning of Treasury and agency MBS markets rather than to provide further monetary policy accommodation by pushing down longer-term yields.”
- The Committed also took steps to ease credit conditions through the discount window, intraday credit, bank capital and liquidity buffers, and reserve requirements. It also established U.S. dollar liquidity swap line arrangements.
Key Implications
- Unsurprisingly, the discussion in the FOMC’s second emergency meeting in March centered on COVID-19 and its potential economic impact. Participants clearly saw the severe downside risks that the virus posed to the U.S. and global economy. The FOMC expressed concern on how it will impact vulnerable sections of the economy, the industries it will hit, and the impending deterioration of the labor market.
- These concerns spurred the FOMC to take steps to provide the monetary stimulus needed to “limit downside near-term outcomes”. Indeed, the Federal Reserve set the tone for policy response in the early days of the outbreak in America, moving quickly and forcefully to cushion the impact of the virus on households and businesses.
- They are not done yet, however. Earlier this week, the Fed announced it will establish a facility that will offer term financing backed by loans from the payroll protection program, a move that will help relieve the stress on small and medium sized businesses.
